[BUG] Cowork (Windows): "Upgrade projects" forces archiving of local-folder projects — no way to upgrade them, and new project creation is blocked until they are archived

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

Environment

• Claude Desktop (Windows), version: 1.37937.3
• Cowork (UI language: Japanese)

When I try to create a new Cowork project, an "Upgrade projects" dialog appears:

Before continuing, upgrade your existing projects or archive the ones you don't need. These projects will be archived: - (Project A) — Local folders can't be upgraded yet - (Project B) — Local folders can't be upgraded yet

Projects that use a local folder as context cannot be upgraded, so the only way to continue is to archive them. I cannot create a new project without archiving my existing, actively used projects.

Local-folder projects are the core Cowork workflow for desktop users. Forcing archive (instead of migration) means losing the project's setup in the UI and rebuilding it manually, while new-format projects still have limited folder support (see #92710, #76694).

What Should Happen?

• Projects with local-folder context should be upgradable, keeping their instructions, history and folder bindings, OR
• Users should be able to defer the upgrade and keep creating new projects until local-folder upgrade is supported.

Error Messages/Logs

Steps to Reproduce

1. On Claude Desktop (Windows), have existing Cowork projects that use a local folder as context (created before the new project format).
2. In Cowork, try to create a new project.
3. The "Upgrade projects" dialog appears, listing the local-folder projects as "will be archived — Local folders can't be upgraded yet".
4. There is no option to upgrade them; the only way to proceed with creating a new project is to archive them.

Claude Model

None

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

N/A — Claude Desktop app (Cowork), version 1.37937.3

Platform

Other

Operating System

Windows

Terminal/Shell

Other

Additional Information

_No response_